The director of the Hungarian company responsible for the toxic waste that flooded villages last week has been arrested as authorities race to finish an emergency dam to hold back a threatened second spill.

Hungary's prime minister, Viktor Orban, announced the arrest of Zoltan Bakonyi in parliament today and said the government was taking control of his Mal Rt aluminium company and freezing its assets. Bakonyi will be held for 72 hours, a government spokesman said.

Experts have warned a second flood could be even more toxic because much of what poured out in the original leak was water, leaving the remaining sludge more concentrated.

Speaking before his arrest, Bakonyi said the company had "observed every regulation to the letter".

A statement on the firm's website said the walls of the burst reservoir met the prescribed standards, based on the findings of a technical survey carried out in 1995.

Orban said the company would be liable for the damage caused. "We need to hold the company responsible for the red sludge spill under state control and its assets under state closure until all of these four tasks are handled," he told parliament.

He said a state commissioner would be appointed to take over control over Mal Rt and manage its assets. Orban also said the safe resumption of production at the plant was in the public interest and was needed to save the jobs of thousands of workers.

Officials said there had been no widening of the cracks overnight on the damaged reservoir. The National Disaster Management Directorate said that measurements taken in the past 24 hours showed no further movement of cracks on the northern wall. More than 500m litres of toxic waste is expected to leak out if the remaining walls collapse.

Gyorgyi Tottos, a spokeswoman for the disaster crews, said the effort to contain the waste was "a race against time" as further rain threatens to increase pressure on the reservoir wall.

Health authorities are warning the local population, as well as clean-up and construction crews, that the amount of red sludge dust in the air exceeds safe limits and say they should use protective gear.

Parts of Kolontar, the town closest to the storage pool, have become uninhabitable and more than 700 residents have been evacuated. Some 6,000 residents of the next village, Devecser, have been ordered to pack a single bag and be ready to abandon their homes at a moment's notice.

A spokesman for Orban said he hoped work on the emergency dam would be completed by tomorrow. "We have 4,000 people and 300 machines working at the scene so we are doing our utmost to prevent another tragedy," he said.

Gusztav Winkler, a professor at Budapest Technical University, who surveyed the site when the reservoir was being built 30 years ago, told Reuters the structure of the soil made the reservoir unstable.